How to determine a fair percentage

How is a percentage usally determined when licensing a product? Let's say I have a product that I know is going to cost about $.50 to produce, will wholesale for $5 and sell about 20,000 units per year. What do you think is a reasonable percentage? I've read license agreements range from 2% to 20%, that's a huge range. I've also heard that 7.5% is the norm.... who do I believe?

Thanks for the input!

James

James, the average rate runs about 3% to 5% in most cases. You can get higher, but that is not the norm. Every company sets their own policy.

Is it common to get money up front or only upon sales? Thanks for answering the newbie questions!

James

James, in this economy it is more difficult to get an advance. One thing that Inventors need to remember if they get an advance it is normally an advance on future royalties, not a separate check. So if they give you a $10,000 advance you will not see another check until they have brought in enough money to cover the $10,000 you would have recieved as a normal royalty if they had not given you an advance.
Most companies pay royalties on a quarterly basis so it could be the next quarter or even the next year before you would see another check depending on your royalty rate, the amount of units sold and how quickly they receive their payments from the companies they are selling your product.
This is a point a lot of Inventors overlook. If you sign an agreement with a company today and they are starting your product from scratch it can be 8 months to a year before the product hits the shelves and then another 3 months before the money from the sales start coming back. So, realistically from the day they say Yes and you see your first check can be a year or more. That is why I tell Inventors once you get a contract signed don't go out and buy a new car because it will be awhile before you actually get the cash. Also, don't base a house payment or car payment on a royalty check. Because sales bounce up and down and so will your royalty check.